Full text of Marriner S. Eccles Papers : Proposed Reduction in Maximum Rate on Federal Housing Administration Mortgages, Box 73, Folder 19, Item 3

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

r

July 13, 1939

PROPOSED REDUCTION IN MAXIMUM RATE ON FEDERAL
HOUSING ADMINISTRATION MORTGAGES
In the interests of recovery, it is suggested that the Federal
Housing Administrator reduce the maximum interest rate on Federal Housing Administration mortgages by one-half of one per cent from 5 per cent
to 4 l/2 per cent and that the Reconstruction Finance Corporation lower
its buying rate for Federal Housing Administration mortgages to 3 l/2
per cent*
Reasons for the recommendation
1* The reduction in rates secured in the 1938 amendments to
the National Housing Act, together with other provisions giving more
favorable terms to borrowers, produced a large new demand for home construction under the Federal Housing Administration plan* The effect of
a reduction of one-half of one per cent in the effective rate to borrowers at the present time, therefore, seems likely to result in a substantial increase in applications from people who are now deterred because
there is not a sufficient differential between the cost of constructing
a new home and the level of rents* It is important to tap a new group
of borrowers if residential construction is to continue to expand*
2 m Since Federal Housing Administration rates were reduced
in February 1938 there has been a further decline in other interest
rates* Long-term U* S* Treasury bonds, for example, have declined 5/8
of one per cent to an average yield of only a little over 2 per cent*
High-grade municipal bonds have declined 3/8 of one per cent and highgrade corporate bonds have declined l/4 of one per cent and these yields
are now at record low levels*
3* Rates on long-term home mortgages in foreign countries are
substantially below the Federal Housing Administration maximum, despite
the fact that lenders are not protected by any similar type of insurance.
The building societies of England now charge 4 l/2 per cent* In Sweden
it is possible to obtain a first mortgage up to 60 per cent of the value
for 60 years at about 3 per cent*
4* The competition among lenders, at least in certain areas,
has resulted in a reduction of actual rates below the Federal Housing
Administration maximum* This is particularly true in the New York area
where 53 per cent of the new home Federal Housing Administration mortgages are being placed at less than 5 per cent*
5* Under the terms of the recent amendments to the Housing
Act, the insurance premium on homes costing $6,000 and less increased
from l/4 per cent per annum on the declining balance to l/2 per cent»




S3

If the effect of this increased cost to the borrowers is not to result
in a reduced demand for housing, it appears necessary that administrative action should be taken to reduce the maximum interest charge*
6 . The importance to borrowers of a reduction of one-half of
one per cent in the effective rates, that is, from 5 l/2 to 5 per cent,
is indicated by the fact that it is the equivalent of a reduction of
about Si per cent in the total construction cost on a small home, or of
about 15^ per cent of the direct labor costs *
Possible objection to reducing the maximum rate
The reduction would make banks reluctant to lend*
Answer
In view of the decline in yields on high-grade securities
which are now the principal outlet for banking funds, and the need for
earnings, the proposed maximum rates would still seem extremely attractive to the great majority of banks • In fact, some banks have voluntarily lowered their rates below the permitted maximum* In any case,
the lower rate can be made effective by having the Reconstruction
Finance Corporation lower the rate at which it will purchase Federal
Housing Administration mortgages from the present 4 l/4 per cent rate
to 3 1/2 per cent. Competition of agencies which will make Federal
Housing Administration mortgages at 4 l/2 per cent and sell them to
the National Mortgage Association at 3 l/2 per cent for the sake of
the one per cent servicing fee will force banks into line*
General comment
No legislation would be necessary to reduce these rates* It
would require only administrative action by the Federal Housing Administration and the Reconstruction Finance Corporation*




Jtoly 1 2 , 1939
Mr* Currie
Bd&ry Bdnlitoft
The information you wanted on the Federal Housing Administration and
the Federal Bational Mortgage Association la shown below*
FEDERAL HOUSIBG ADMIHISTRATI ON
1939 lay
(per cent per annua)

19S8 lay
(Per cent per annua)

iSajdaua interest rates and In*
suranee premiumst
Section 205 - covering laortgages up to #16*000 on new
or old property************ 6 on declining balance 5 on declining balance
Insurance premium (l/s to 1
n
a
*
per cent - law)***.••*••***
ft
m
a
Total*************
Section 207 - covering obligations up to $5,000,000 of
*
new large-scale projects***
*
Insurance p r e e d w (no statun
a
tory amount)•••**•*•*•**•*• g a
a
TotaX****«******** 6 it
Section 210 - covering nortgages of fl6*000 to $200,000 on new construction**** (Repealed)
Insurance y r m & x m (no static
«
n
tory anomt)#*#•****#*****•
a
a
Total*******.*****
e Jtouary 19S8 to July 1959 - 'premium fixed a t 2/4 per cent of declining balance on ne* small h a m s up to #5,400*
M&arittcni maturity
Section 203
lew snail homes up to
#5,400 mortgage ********* 25 years
Other new hones and existing properties up to
$16*000***************** 20 years
Section 207 - large-scale
(no statutory limit) in
practice generally 20-30
years********************
years average
Section 210 - $16,000 to
|200»000«*«********#***** (Repealed)




25 years
20 years

years average
21 years

FEDERAL BATIOSAL MORTGAGE ASSOCIATIOH

In practice they only bty Federal Housing Administration aortgages en neir
homes (built after January 1* 1936) * He statutory minimum on rate but in prac~
tiee mortgages are purchased to yield 4 l/t per cent*
types

Section 205 * regular
Bought to yield
If interest rate is 6 per cent - no service charge***********
4 l/4 JS
*
*
*
per cent plus l/Z per cent service
charge********.**.*********************
4 l/2
*
*
*
* i e S Q than S per cent but not less than
4 s/4 per eent * no service charge*****
4 1/4
*
*
*
* £ Q S 8 then 4 5/4 per eent Federal Bational
Mortgage Association will not purchase
Section 207 - large-scale
(Purchased through Bay 31* 193&, only 9 totaling $5,789,000**
4 l/*jr